Explain how each of the following will affect the economy, by analyzing each case in an SRAS-AD diagram and determine in each case the effects on real GDP and the general price level:
The interest rates are raised by the Fed.
“Fracking” for gas and oil expands, and oil & energy prices in the U.S. fall.
The stock market soars and American wealth expands significantly.
The government cuts government spending on transfer payments.
Many labor unions demand, and get, large wage-increases.
Exchange Rates: US$1 = 6.43 yuan in 2011 and US$1 = 6.12 yuan in 2013.
The data show that the dollar appreciated against the Chinese yuan. True or False?
The indicated change in the exchange rate will tend to (increase/decrease) US exports to China and (increase/decrease) imports from China.
Applying the SRAS-AD model, we’d say that the effect of this given change in the exchange rate is to make the general price level in the US (increase/decrease), while total production and employment will (increase/decrease).
Read the Time article “Paradox of Thrift (Links to an external site.)” (Feb23, ’09) p 16.
Explain the paradox of thrift within the framework of the SRAS-AD Model.
The Keynesian response to the situation described above would have the government do a “stimulus spending” program. In this policy approach, what replaces consumer spending to drive AD up?
Discuss (explain) the effect of the policy approach that you analyzed in the question above on the budget balance of the government.
Read the BusinessWeek article “The Swiss Franc Soars, and Tourism Suffers (Links to an external site.)” dated Oct 7, 2010.
According to the article, the Swiss franc has _____________________ (appreciated/depreciated) against the euro and the US dollar, and this has made the prices is Switzerland much __________________ (higher/lower) for American tourists.
An AS-AD analysis would confirm what the article says: that the indicated change in the value of the franc is making inflation (change in general P) in Switzerland _______________ (high/low). That’s because Switzerland’s NX __________________ (increases/decreases), driving AD to the _____________ (right/left).
If the government cuts personal income taxes, then AD would tend to increase. But this effect on AD might be weakened by what?
Transfer payments (Tr) have a more direct impact on AD, more so than government purchases (G). True or False? Explain briefly.
The macroeconomic problem faced by an economy whose actual GDP is below potential GDP is _____________ (unemployment / inflation). To deal with this situation, the government needs to shift AD to the _________________ (right / left) where the intended goal is to increase _______________ (GDP / gen P).
If we already have a budget deficit, then an expansionary fiscal policy will tend to reduce the deficit. True or False? Explain.
Read the AP article “Dems, GOP talk up deficit reduction, but don't act (Links to an external site.)” by C. Babington (Apr25’13).
What are the two basic ways of shrinking a budget deficit?
Which of your answers above are Republicans vehemently against? What are the potential negative economic effects of implementing this basic policy?
Which of your answers above are Democrats strongly opposed to? What are the potential negative economic effects of implementing this basic policy?